Essay About Firm’S Debt Beta And Target D

Finance Midterm Cheat Sheet
Where D/V = the target D/V ratio    and V = net D + E [pic 1]        Unlevered cost of capital (use with APV method) [pic 2]If the firm’s debt beta = 0 and firm will maintain a constant debt ratio (i.e. % of debt), then [pic 3]If the firm’s debt beta = 0 and firm will maintain a constant debt level (i.e. $ value of debt), then [pic 4]Debt values are NET of cash, so subtract cash from debt values when accounting for D/E and D/Enterprise Value Beta of Assets formula:  [pic 5]Change in net working capital = AR + Inv – AP Cash Flow = EBIT – Taxes + Depreciation & Amortization – CapEx – Change in NWC E(CFt) are unique and market risk while (1+r)t are only market risk: [pic 6]CAPM: [pic 7]Factors that influence Beta: cyclicality (more cyclical = higher beta), operating leverage (higher fixed vs. variable costs = higher beta), growth (more growth = higher beta), financial leverage (more debt = higher beta). Expected return on the market (via Gordon growth model):  where Div = next year’s dividend, P0 = current stock price (you’re calculating the dividend yield) + future dividend growth %[pic 8]Gordon Growth model: terminal value = [pic 9]Stock price today = dividend yield / (Re – g)       Also   Price today = EPS * P/E ratio   [pic 10]  and the forward price/dividend ratio [pic 11]     where g = dividend growth rate  and Re = cost of equity Modigliani-Miller Theorem: EV of a firm is independent of how it’s financed if no taxes, no cost of financial distress, no asymmetric information, and no agency costs. In MM world, the WACC doesn’t change as capital structure changes. Cash flows to all investors (after-tax): [pic 12] where X = EBIT, Tc = corporate tax rate, Te = personal equity income tax rate, Td = personal debt interest tax rate. The first part of the equation is if the company has no debt, the second part is the tax shelter created by debt (the value of the tax shield).